How the Gold Standard Contributed to the Great Depression

[Old Rocks]

There's nothing wrong with deflation. Who wouldn't want their money to be worth more? And no, you don't want to inflate the money supply during a recession.

Of course, if you have real property like real estate, or manufacturing machinery, you find yourself losing money every day, and no way to get credit to keep going.

 

[Iriemon]

There's nothing wrong with deflation. Who wouldn't want their money to be worth more? And no, you don't want to inflate the money supply during a recession.

Of course, if you have real property like real estate, or manufacturing machinery, you find yourself losing money every day, and no way to get credit to keep going.

That's a major problem in a recession, that the gold bugs don't acknowledge. Or when pressed their answer is to let it all go bankrupt because obviously those weren't successful companies.

The exact thinking that got us into the first Great Depression. Their defense to that was that the country wasn't on a "real" gold standard them, but a "fake" one for reasons I've never seen explained.

The claim that deflation is harmless has been rebutted repeatedly just in the short time I've been here. It discourges investment and purchases, two key elements in the economy. Why buy a car now if it cheaper next year? While lend out or invest money if it grows in value by just holding it? It increases the cost of money because you are getting less to pay back the loan -- the money you pay back is more valuable than the money you borrowed.
All not positive.

 

[Toro]

Deflation is not harmless in a leveraged economy. It is devastating.

 

[LOki]

No. So can you explain in more detail? What exactly did the US do, for example, to "artificially holding domestic interest rates, and fixing prices at levels that protect failing [to create wealth in excess of their capacity to consume it] foreign currencies from collapsing."

Was this the Fed? Did it set interest rates high or low? What foreign currencies were we trying to keep from collapsing, and how did interest rate policy affect that?

Here you go.

Thanks for your response. However it in no way substantiated your claims.

If you considered reading up on the subject, you might have run across some of these nuggets that apprently do substanitiate my claim:

From the 1870s to the outbreak of World War One in 1914, the world benefited from a well integrated financial order. Money unions were operating which effectively allowed members to accept each others currency as legal tender including the Latin Monetary Union (Belgium, Italy, Switzerland, France) and Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial power, exporting more capital as a percentage of her national income than any other creditor nation has ever since.

As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes.

Beginning in 1917, the U.S. began to extend cash and supplies to its European allies, expending more than $7 billion in government funds by the time of the armistice in November 1918. Following that, an additional $3 billion was directed to relief and reconstruction efforts of both the Allies and new European nations that grew out of the Paris peace negotiations.

By the end of WW1, Great Britain was heavily indebted to the United States, allowing the USA to largely displace her as the worlds number one financial power.

One reason for the monetary inflation was to help Great Britain, which, in the 1920s, was struggling with its plans to return to the gold standard at pre-war (World War I) parity. Returning to the gold standard at this rate meant that the British economy was facing deflationary pressure.

As had happened after previous major wars, the UK was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price.

Practical economic realities also seemed to dictate a rethinking of the debt issue. It was unlikely that the Europeans would be able to repay their obligations in gold, as the U.S. wanted, because that commodity was needed to back up their faltering currencies.

February 9, 1922 - Congress established the World War Foreign Debt Commission. The commission rounded debts owed to the United States to $11.5 billion repayable over a 62 year term at two percent interest. The loans were never fully repaid.

Congress authorized the creation of a World War Foreign Debts Commission under Secretary of the Treasury Andrew Mellon to negotiate repayment agreements with Great Britain and France. The Commission placed the Allied debt principle to the United States at $11 Billion; payments were to be made in graduated 62 annual installments; however, the accrued interest on these payments over a period of 62 years would have increased the debt to approximately $22 billion, although the U.S. did agree to lowered interest rates. Great Britain’s debt was reduced 19.7% to $4.6 Billion with the interest rate reduced from 5% to 3% for the 1st 10 years of payment to be raised to 3½% thereafter. France’s debt was reduced by 52.8% to $4 Billion, without any interest for the 1st 5 years of payment. It was then to be increased gradually to 3½%.

April 9, 1924 - The Dawes Plan was transmitted to the Reparation Commission. It was accepted by Germany on April 16, 1924.

The Dawes Plan provided short term economic benefits to the German economy. It softened the burdens of war reparations, stabilized the currency, and brought increased foreign investments and loans to the German market.

While it was a short term success, the Dawes Plan proved to be a monumental failure because the annual payments required were too large and it required the United States to give massive loans to Germany to pay reparations. The countries receiving this money then used it to repay war loans to the United States.

However, it made the German economy dependent on foreign markets and economies, and therefore problems with the U.S. economy (e.g. the Great Depression) would later severely hurt Germany as it did the rest of the western world, which was subject to debt repayments for loans of American dollars.

This cycle meant that the stock market crash of 1929 caused Germany to no longer be able to pay reparations and prevented the Allies from repaying debt owed to the United States.

After World War I, this cycle of money from U.S. loans to Germany, which then made reparations to other European nations, which then used the money to pay off their debts to America, locked the western world's economy on that of the U.S.

The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."​

By what, walking into the Reichstag and declaring Germany the property of the United States?

Not quite, but that's the spirit.

Which we can now reject as complete nonsense.

Not really, but thanks for playing.

 

[Iriemon]

Here you go.

Thanks for your response. However it in no way substantiated your claims.

If you considered reading up on the subject, you might have run across some of these nuggets that apprently do substanitiate my claim:

From the 1870s to the outbreak of World War One in 1914, the world benefited from a well integrated financial order. Money unions were operating which effectively allowed members to accept each others currency as legal tender including the Latin Monetary Union (Belgium, Italy, Switzerland, France) and Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial power, exporting more capital as a percentage of her national income than any other creditor nation has ever since.

As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes.

Beginning in 1917, the U.S. began to extend cash and supplies to its European allies, expending more than $7 billion in government funds by the time of the armistice in November 1918. Following that, an additional $3 billion was directed to relief and reconstruction efforts of both the Allies and new European nations that grew out of the Paris peace negotiations.

By the end of WW1, Great Britain was heavily indebted to the United States, allowing the USA to largely displace her as the worlds number one financial power.

One reason for the monetary inflation was to help Great Britain, which, in the 1920s, was struggling with its plans to return to the gold standard at pre-war (World War I) parity. Returning to the gold standard at this rate meant that the British economy was facing deflationary pressure.

As had happened after previous major wars, the UK was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price.

Practical economic realities also seemed to dictate a rethinking of the debt issue. It was unlikely that the Europeans would be able to repay their obligations in gold, as the U.S. wanted, because that commodity was needed to back up their faltering currencies.

February 9, 1922 - Congress established the World War Foreign Debt Commission. The commission rounded debts owed to the United States to $11.5 billion repayable over a 62 year term at two percent interest. The loans were never fully repaid.

Congress authorized the creation of a World War Foreign Debts Commission under Secretary of the Treasury Andrew Mellon to negotiate repayment agreements with Great Britain and France. The Commission placed the Allied debt principle to the United States at $11 Billion; payments were to be made in graduated 62 annual installments; however, the accrued interest on these payments over a period of 62 years would have increased the debt to approximately $22 billion, although the U.S. did agree to lowered interest rates. Great Britain’s debt was reduced 19.7% to $4.6 Billion with the interest rate reduced from 5% to 3% for the 1st 10 years of payment to be raised to 3½% thereafter. France’s debt was reduced by 52.8% to $4 Billion, without any interest for the 1st 5 years of payment. It was then to be increased gradually to 3½%.

April 9, 1924 - The Dawes Plan was transmitted to the Reparation Commission. It was accepted by Germany on April 16, 1924.

The Dawes Plan provided short term economic benefits to the German economy. It softened the burdens of war reparations, stabilized the currency, and brought increased foreign investments and loans to the German market.

While it was a short term success, the Dawes Plan proved to be a monumental failure because the annual payments required were too large and it required the United States to give massive loans to Germany to pay reparations. The countries receiving this money then used it to repay war loans to the United States.

However, it made the German economy dependent on foreign markets and economies, and therefore problems with the U.S. economy (e.g. the Great Depression) would later severely hurt Germany as it did the rest of the western world, which was subject to debt repayments for loans of American dollars.

This cycle meant that the stock market crash of 1929 caused Germany to no longer be able to pay reparations and prevented the Allies from repaying debt owed to the United States.

After World War I, this cycle of money from U.S. loans to Germany, which then made reparations to other European nations, which then used the money to pay off their debts to America, locked the western world's economy on that of the U.S.

The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."​

Thanks. How does any of this 1) defend the superiority of a gold standard? and 2) Show that the Fed having to raise interest rates early in the recession to maintain the gold standard not hurt the economy and cause the recession to worsen?

Not quite, but that's the spirit.

Which we can now reject as complete nonsense.

Not really, but thanks for playing.

Unless you can explain your assertion better than that, game over.

 

[editec]

We go on a gold stadard right now and we're be bankrupting most people, folks.

Of course the gold bugs won't mind that one bit, will they?

They've been hording their money for years and taking it on the neck by locking their money into something that returns NOTHING on the investment and they want to FINALLY be proven right and to become the masters of the universe.

Can't blame them really.

Who doesn't want to rule the world?

 

[Iriemon]

We go on a gold stadard right now and we're be bankrupting most people, folks.

Of course the gold bugs won't mind that one bit, will they?

They've been hording their money for years and taking it on the neck by locking their money into something that returns NOTHING on the investment and they want to FINALLY be proven right and to become the masters of the universe.

Can't blame them really.

Who doesn't want to rule the world?

I'd expect that is true.

Gold supporters who bought gold in the early 80s achieved a about a -0-% return over the past 30 years. Versus someone who invested in the stock market is about 700% up even with the recent crash.

What better way to prove the value of gold than make it the basis for money?

 

[LOki]

Thanks. How does any of this 1) defend the superiority of a gold standard?

Hi. Dumbfuck. Go back and read what this was posted to defend. This time actually read. Bonus points for comprehension.

2) Show that the Fed having to raise interest rates early in the recession to maintain the gold standard not hurt the economy and cause the recession to worsen?

The point of raising interest rate was NOT to maintain the gold standard. Read a post before replying for a fucking change of pace, ok?

Unless you can explain your assertion better than that, game over.

The explanation was clearly presented; your failure to read it is not my failure to present it.

 

[Iriemon]

... Dumbfuck....

Ignored.

 

[LOki]

... Dumbfuck....

Ignored.

What else is new?

 

[Iriemon]

... Dumbfuck....

Ignored.

What else is new?

Nothing. Maybe you can find someone else to engage in an infantile flame war if that's how you get your thrills.

I'll respond to your posts to me if you want to wrote them without juvenile taunts or name calling.

Otherwise I'm happy to discuss the issues in this thread or my posts with anyone else.

 

[LOki]

Ignored.

What else is new?

Nothing.

The crux of the biscuit folks.